Health & Human Services

Medicaid's Breaking Point

Language is powerful. So when a negative word becomes linked to an idea or program, the result often is damaging.
That's what I see happening...

Language is powerful. So when a negative word becomes linked to an idea or program, the result often is damaging.

That's what I see happening with Medicaid. Almost every time governors, state legislators or budget officials mention the health program for low-income people, they connect it to the word "unsustainable" - as in, "Medicaid is unsustainable."

The phrase is becoming received wisdom, and it's easy to see why. Medicaid now represents 23 percent of state outlays - the single largest portion of total state spending - and is likely to consume even more in the future. When they talk about unsustainability, most state officials mean that Medicaid's rate of growth will outpace that of state revenues and, if the program's expenses aren't brought under control, force states to cut spending on education and other priorities.

But is it so? A recent academic study takes issue with the revenue premise and suggests that the received wisdom may not be quite right. Richard Kronick, a professor at the University of California, San Diego, and David Rousseau, a principal policy analyst at the Kaiser Commission on Medicaid and the Uninsured, came up with these counterintuitive findings: The Medicaid program may be expensive - so is all health care - but state revenues are likely to be ample enough to support Medicaid spending growth as well as other priorities.

Kronick and Rousseau put together a 40-year projection of Medicaid spending that takes into account an anticipated bulge in enrollment (thanks to baby boomers reaching the years of health neediness), declines in the employee coverage of health insurance (it went down by 4 percentage points between 2001 and 2005), changes in the number of enrollees with disability (the huge upswing of the past 25 years is leveling off) and differences in the growth rates of long-term and overall health care costs.

They then compared that projection with forecasts of growth in state revenues. The bottom line, as they expressed it at a recent meeting at the Urban Institute, is that if state revenues increase at their historic pace for the next 20 years (an average real growth rate of 2.8 percent annually) and Medicaid goes along at its projected rate of growth, state revenues available for programs other than Medicaid "will be substantial." If state revenues flag and grow at a lower-than-normal rate - say, 2.3 percent a year - money would still be available for increases in programs other than Medicaid.

In other words, Medicaid isn't such a big, bad fiscal wolf.

That's good to hear. But even the rosiest of sustainability projections do little to allay state officials' concerns about the big expenditure numbers Medicaid posts, even though those expenses rose at a much lower rate this past year. The only other time per-capita Medicaid spending fell was between 1995 and 1996, when states began converting parts of their Medicaid programs to managed care. The decreases this time around were due to cuts in provider rates, increases in the use of other cost savers such as disease management programs and - most significant - big declines in prescription drug costs. Much of this was thanks to Medicare Part D, which went into effect in early 2006 and put the onus on the federal government to absorb the costs of drugs for those old and poor enough to be eligible for both Medicaid and Medicare. But credit for the lower costs is also due to the states themselves. They made several moves - from formularies to insistence on generic drugs - to contain those drug costs.

Nevertheless, no one expects the decline to continue. The cost-containment measures are now factored into the base. It will be back to growth as usual, and that's the real problem for Medicaid and the so-called sustainability issue: While Medicaid is likely to hold steady as a percentage of national health expenditures - averaging 16.6 percent for the next 20 years, according to Kronick and Rousseau - the underlying expenditures are on the upswing. The Centers for Medicaid & Medicare projects that health spending will increase substantially as a share of the Gross Domestic Product in the next 20 years.

"Policy makers concerned about the sustainability of Medicaid," Kronick and Rousseau noted at their Urban Institute presentation, "might be better served by a focus on the rate of health care cost growth more generally, and not on Medicaid in particular."